Intrinsic Value – Call & Put Option – Finance Exam

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Intrinsic Value - Call & Put Option - Finance Exam
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Intrinsic Value – Call & Put Option – Finance Exam

These chapters discuss actual price, intrinsic value – call & put option – The final finance exam is based on these chapter.


The _________ is the difference between the actual call price and the intrinsic value.

A. stated value
B. strike value
C. time valuecorrect
D. binomial value


A call option with several months until expiration has a strike price of $55 when the stock price

is $50. The option has _____ intrinsic value and _____ time value.

A. negative; positive
B. positive; negative
C. zero; zero
D. zero; positivecorrect


All else equal, call option values are _____ if the _____ is lower.

A. higher; stock price
B. higher; exercise pricecorrect
C. lower; dividend payout
D. lower; stock volatility


A put option with several months until expiration has a strike price of $55 when the stock price is $50. The option has _____ intrinsic value and _____ time value.

A. negative; positive
B. positive; positivecorrect
C. zero; zero
D. zero; positive


A stock with a current market price of $50 and a strike price of $45 has an associated call option priced at $6.50. This call has an intrinsic value of ______ and a time value of _____.

A. $5; $1.50- correct
B. $1.50; $5
C. $0; $6.50
D. $6.50; $0


A stock with a current market price of $50 and a strike price of $45 has an associated put option priced at $3.50. This put has an intrinsic value of ______ and a time value of _____.

A. $3.50; $0
B. $5; $3.50
C. $3.50;$5
D. $0; $3.50correct


Investor A bought a call option that expires in 6 months. Investor B wrote a put option with a 9-month maturity. All else equal, as the time to expiration approaches, the value of investor A’s position will _______ and the value of investor B’s position will
_______.

A. increase; increase
B. increase; decrease
C. decrease; increasecorrect
D. decrease; decrease


Investor A bought a call option, and investor B bought a put option. All else equal, if the interest rate increases, the value of investor A’s position will ______ and the value of investor B’s position will _______.

A. increase; increase
B. increase; decreasecorrect
C. decrease; increase
D. decrease; decrease


Investor A bought a call option, and investor B bought a put option. All else equal, if the underlying stock price volatility increases, the value of investor A’s position will ______ and the value of investor B’s position will _______.

A. increase; increasecorrect
B. increase; decrease
C. decrease; increase
D. decrease; decrease


Before expiration, the time value of an out-of-the-money stock option is __________.

A. equal to the stock price minus the exercise price
B. equal to zero
C. negative
D. positivecorrect


The intrinsic value of a call option is equal to _______________.

A. the stock price minus the exercise pricecorrect
B. the exercise price minus the stock price
C. the stock price minus the exercise price plus any expected dividends
D. the exercise price minus the stock price plus any expected dividends


The value of a call option increases with all of the following except ___________.

A. stock price
B. time to maturity
C. volatility
D. dividend yieldcorrect


The value of a put option increases with all of the following except ___________.

A. stock pricecorrect
B. time to maturity
C. volatility
D. dividend yield


Which of the following is a true statement?

A. The actual value of a call option is greater than its intrinsic value prior to expiration. – correct
B. The intrinsic value of a call option is always greater than its time value prior to expiration.
C. The intrinsic value of a call option is always positive prior to expiration.
D. The intrinsic value of a call option is greater than its actual value prior to expiration.


Strike prices of options are adjusted for ____________ but not for ____________.

A. dividends; stock splits
B. stock splits; cash dividendscorrect
C. exerciseofwarrants;stocksplits
D. stockpricemovements;stockdividends


A high dividend payout will ______ the value of a call option and ______ the value of a put option.

A. increase; decrease
B. increase; increase
C. decrease; increasecorrect
D. decrease; decrease


The price of a stock put option is __________ correlated with the stock price and __________ correlated with the exercise price.

A. negatively; negatively
B. negatively; positivelycorrect
C. positively; negatively
D. positively; positively


A higher- dividend payout policy will have a __________ impact on the value of a put and a __________ impact on the value of a call.

A. negative; negative
B. negative; positive
C. positive; negativecorrect
D. positive; positive


If a stock price increases, the price of a put option on the stock will __________ and the price of a call option on the stock will __________.

A. decrease; decrease
B. decrease; increase- correct
C. increase; decrease
D. increase; increase


Which one of the following will increase the value of a put option?

A.a decrease in the exercise price
B.a decrease in time to expiration of the put
C. an increase in the volatility of the underlying stockcorrect
D.an increase in stock price


The intrinsic value of an out-of-the-money call option ___________.

A. is negative
B. is positive
C. is zerocorrect
D. cannot be determined


A call option has an exercise price of $30 and a stock price of $34. If the call option is trading for $5.25, what is the intrinsic value of the option?

A. $0
B. $1.25
C. $4correct
D. $5.25


A call option has an exercise price of $35 and a stock price of $36.50. If the call option is trading at $2.25, what is the time value embedded in the option?

A. $0
B. $.75correct
C. $1.50
D. $2.25


If a firm increases its plowback ratio, this will probably result in _______ P/E ratio.

A. a higher
B. a lower
C. an unchanged
D. The answer cannot be determined from the information given.correct


The value of Internet companies is based primarily on _____.

A. current profits
B. Tobin’s q
C. growth opportunitiescorrect
D. replacement cost


New-economy companies generally have higher _______ than old-economy companies.

A. book value per share
B. P/E multiples- correct
C. profits
D. asset values


Which one of the following statements about market and book value is correct?

A. All firms sell at a market-to-book ratio above 1.
B. All firms sell at a market-to-book ratio greater than or equal to 1.
C. All firms sell at a market-to-book ratio below 1.
D. Most firms have a market-to-book ratio above 1, but not all. – correct


Which one of the following is a common term for the market consensus value of the required return on a stock?

A. dividend payout ratio
B. intrinsic value
C. market capitalization ratecorrect
D. plowback ratio


Which one of the following is equal to the ratio of common shareholders’ equity to common shares outstanding?

A. book value per sharecorrect
B. liquidation value per share
C. market value per share
D. Tobin’s q


A firm has current assets that could be sold for their book value of $10 million. The book value of its fixed assets is $60 million, but
they could be sold for $95 million today. The firm has total debt at a book value of $40 million, but interest rate changes have
increased the value of the debt to a current market value of $50 million. This firm’s market-to-book ratio is ________.

A. 1.83correct
B. 1.5
C. 1.35
D. 1.46

Explanation
market = 10 + 95 – 50 = 55
Book = 10 + 60 – 40 = 30
50/30 = 1.8333


A firm cuts its dividend payout ratio. As a result, you know that the firm’s _______.

A. return on assets will increase
B. earnings retention ratio will increasecorrect
C. earnings growth rate will fall
D. stock price will fall


__________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its
debt, and distributing the remainder to shareholders.

A. Book value per share
B. Liquidation value per sharecorrect
C. Market value per share
D. Tobin’s q


The constant-growth dividend discount model (DDM) can be used only when the ___________.

A. growth rate is less than or equal to the required return
B. growth rate is greater than or equal to the required return
C. growth rate is less than the required returncorrect
D. growth rate is greater than the required return


You want to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the
upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant-growth DDM, the
intrinsic value of stock A _________.

A. will be higher than the intrinsic value of stock Bcorrect
B. will be the same as the intrinsic value of stock B
C. will be less than the intrinsic value of stock B
D. The answer cannot be determined from the information given.


Each of two stocks, A and B, is expected to pay a dividend of $7 in the upcoming year. The expected growth rate of dividends is 6%
for both stocks. You require a return of 10% on stock A and a return of 12% on stock B. Using the constant-growth DDM, the
intrinsic value of stock A _________.

A. will be higher than the intrinsic value of stock Bcorrect
B. will be the same as the intrinsic value of stock B
C. will be less than the intrinsic value of stock B
D. The answer cannot be determined from the information given


The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected
EPS is $5. If the firm’s plowback ratio is 50%, its P/E ratio will be _________.

A. 8.33
B. 12.5correct
C. 19.23
D. 24.15

Explanation
G = (1-.5) x .12 = 6%
D1 = Plowback x EPS = $2.50
V0 = 2.5 / (10-6%)
P/E = $62.5 / 5 = $12.5


The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected
EPS is $5. If the firm’s plowback ratio is 60%, its P/E ratio will be _________.

A. 7.14
B. 14.29- correct
C. 16.67
D. 22.22


Sinking funds are commonly viewed as protecting the _______ of the bond.

A.issuer
B. underwriter
C. holder- correct
D. dealer


If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.)

A.capital gain; capital loss
B.capital gain; capital gain
C. capital loss; capital gain- correct
D. capital loss; capital loss


TIPS offer investors inflation protection by ______________ by the inflation rate each year.

A.increasing only the coupon rate
B.increasing only the par value
C. increasing both the par value and the coupon payment- correct
D. increasing the promised yield to maturity


To earn a high rating from the bond rating agencies, a company would want to have:
I. A low times-interest-earned ratio
II. A low debt-to-equity ratio
III. A high quick ratio

A.I only
B.II and III only- correct
C. I and III only
D. I, II, and III


A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date.

A. callable
B. coupon
C. puttable- correct
D. Treasury


Bonds rated _____ or better by Standard & Poor’s are considered investment grade.

A. AA
B. BBB- correct
C. BB
D. CCC


You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following?

A. mortgage bonds
B. senior debentures
C. preferred stock- correct
D. equipment obligation bonds


A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.

A. callable- correct
B. coupon
C. puttable
D. Treasury


Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years?

A. callable feature
B. convertible feature
C. subordination clause
D. sinking fund- correct


In an era of particularly low interest rates, which of the following bonds is most likely to be called?

A. zero-coupon bonds
B. coupon bonds selling at a discount
C. coupon bonds selling at a premium- correct
D. floating-rate bonds


A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is _________.

A.6%
B. .23%
C. 8.12%- correct
D. 9.45%

Explanation
PMT= 60; FV= 1,000; N=5; PV= 915.48; YTM=. 8.12%


A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.5 discount from par value. The current yield on this bond is _________.

A.6%
B. 6.49%- correct
C. 6.3%
D. 6.8%

Explanation
Current Yield = Annual cash Inflows / P1
Current Yield = 60 / (1,000-75.50) =6.49%


A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be _________.

A.$856.04
B. $891.86- correct
C. $926.4
D. $1,000


A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of
__________ today.

A.$458.11- correct
B. $641.11
C. $89.11
D. $1,100.11


A preferred share of Coquihalla Corporation will pay a dividend of $8 in the upcoming year and every year thereafter; that is,
dividends are not expected to grow. You require a return of 7% on this stock. Using the constant-growth DDM to calculate
the intrinsic value, a preferred share of Coquihalla Corporation is worth _________.

A. $13.50
B. $45.50
C. $91
D. $114.29- correct

Explanation
D/k = 8/.07 = 114.29


Rose Hill Trading Company is expected to have EPS in the upcoming year of $8. The expected ROE is 18%. An appropriate required return
on the stock is 14%. If the firm has a plowback ratio of 70%, its dividend in the upcoming year should be _________.

A. $1.12
B. $1.44
C. $2.40- correct
D. $5.60

Explanation
EPS x D
= 8 x .03 = 2.4


Rose Hill Trading Company is expected to have EPS in the upcoming year of $6. The expected ROE is 18%. An appropriate required
return on the stock is 14%. If the firm has a plowback ratio of 70%, its intrinsic value should be _________.

A. $20.93
B. $69.77
C. $128.57- correct
D. $150

Explanation
V0 – 6(1-.7) / .14 – .18(.70)


Westsyde Tool Company is expected to pay a dividend of $1.50 in the upcoming year. The risk-free rate of return is 6%, and the
expected return on the market portfolio is 14%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from
now. The beta of Westsyde Tool Company’s stock is 1.2. Using the CAPM, an appropriate required return on Westsyde Tool
Company’s stock is _________.

A. 8%
B. 10.8%
C. 15.6%- correct
D. 16.8%


Todd Mountain Development Corporation is expected to pay a dividend of $2.50 in the upcoming year. Dividends are expected to grow at
the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 12%. The stock of Todd
Mountain Development Corporation has a beta of .75. Using the CAPM, the return you should require on the stock is
_________.

A. 7.25%
B. 10.25%- correct
C. 14.75%
D. 21%


Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the upcoming year. Dividends are expected to decline at the
rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou
Gold Mining Corporation has a beta of .5. Using the constant-growth DDM, the intrinsic value of the stock is _________.

A. $50- correct
B. $100
C. $150
D. $200


You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond’s yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________.

A.5%
B. 5.5%
C. .6%- correct
D. 8.9%

Explanation
FV = 1000, PMT = 60, n = 5, i = 4, PV = 1089.04
FV = 1000, PMT = 60, n = 4, i = 3, PV = 1111.51
HPR = (1111.51 – 1089.04 + 60) / 1089.04 = 7.57%


You can be sure that a bond will sell at a premium to par when _________.

A.its coupon rate is greater than its yield to maturity- correct
B.its coupon rate is less than its yield to maturity
C. its coupon rate is equal to its yield to maturity
D. its coupon rate is less than its conversion value


Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at
_________.

A.$97.22- correct
B. $104.49
C. $364.08
D. $32.14


A 3.209% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is (Assume 182 days in the 6-month period.)
_______.

A.$581.9
B. $1,163.93- correct
C. $2,32.8
D. $3,000


A bond pays a semiannual coupon, and the last coupon was paid 91 days ago. If the annual coupon payment is $50, what is the accrued interest? (Assume 182 days in the 6-month period.)

A.$13.21
B. $12.5- correct
C. $15.44
D. $16.32

Explanation
= ($50/2) x (91/182)


A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69?

A.$999.55
B. $1,002.01- correct
C. $1,00.45
D. $1,012.13

Explanation
= 985 + 69(90/365) = $1,002.01


If the quote for a Treasury bond is listed in the newspaper as 99.25 bid, 99.26 ask, the actual price at which you can sell this bond given a $10,000 par value is _____________.

A.$9,828.12
B. $9,925- correct
C. $9,934.3
D. $9,955.43


A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest? (Assume 182 days in the 6-month period.)

A.$4.81- correct
B. $14.24
C. $25
D. $50


You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have risen to 7%. Your 1-year holding-period return was ___.

A. .61%- correct
B. -5.39%
C. 1.28%
D. -3.25%

Explanation
1) N=8; FV = 1000; PMT= 60; i= 6% — > PV = $1000
N = 7, I/Y = 7, PMT = 60, FV = 1,000 Find PV
= PV -946.11
HPR: (946.12-1000+60)/1000 = .61%


An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond?

A.4.8%
B. 4.85%- correct
C. 9.6%
D. 9.%

Explanation

Current Yield = 48 / 989.4
= 4.85%


If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond?

A.4.3%- correct
B. 4.5%
C. 5.2%
D. 5.5%

Explanation

Bond sells at premium when coupon rate is greater than YTM


Which of the following yield curves generally implies a normal healthy economy?

A. positive slope- correct
B. negative slope
C. flat
D. hump-shaped curve


All other things equal (YTM = 10%), which of the following has the longest duration?

A. a 30-year bond with a 5% coupon
B. a 20-year bond with a 9% coupon
C. a 20-year bond with a 5% coupon
D. a 30-year zero-coupon bond- correct


All other things equal (YTM = 10%), which of the following has the shortest duration?

A. a 10-year bond with a 9% coupon- correct
B. a 20-year bond with a 9% coupon
C. a 20-year bond with a 7% coupon
D. a 20-year zero-coupon bond


A pension fund must pay out $1 million next year, $2 million the following year, and then $3 million the year after that. If the discount rate is 8%, what is the duration of this set of payments?

A.2 years
B.2.15 years
C. 2.29 years- correct
D. 2.53 years


All other things equal, which of the following has the longest duration?

A. a 20-year bond with a 10% coupon yielding 10%
B. a 20-year bond with a 10% coupon yielding 11%
C. a 20-year zero-coupon bond yielding 10%- correct
D. a 20-year zero-coupon bond yielding 11%


The duration of a 5-year zero-coupon bond is ____ years.

A. 4.5
B.5- correct
C. 5.5
D. 3.5


You own a bond that has a duration of 6 years. Interest rates are currently 7%, but you believe the Fed is about to increase interest rates by 25 basis points. Your predicted price change on this bond is ________.

A. +1.4%
B. -1.4%- correct
C. -2.51%
D. +2.51%

Explanation
D* = 6/1.07 = 5.61
ΔP/P = -D*(Δy) = -5.61(.25%) = -1.4%


Given its time to maturity, the duration of a zero-coupon bond is _________.

A.higher when the discount rate is higher
B.higher when the discount rate is lower
C. lowest when the discount rate is equal to the risk-free rate
D. the same regardless of the discount rate- correct


All other things equal, a bond’s duration is _________.

A.higher when the yield to maturity is higher
B. lower when the yield to maturity is higher- correct
C. the same at all yield rates
D. indeterminable when the yield to maturity is high


Banks and other financial institutions can best manage interest rate risk by _____________.

A.maximizing the duration of assets and minimizing the duration of liabilities B.minimizing the duration of assets and maximizing the duration of liabilities
C. matching the durations of their assets and liabilities- correct
D. matching the maturities of their assets and liabilities


A bond currently has a price of $1,050. The yield on the bond is 6%. If the yield increases 25 basis points, the price of the bond will go down to $1,030. The duration of this bond is _________.years.

A.7.46
B. 8.08- correct
C. 9.02
D. 10.11

Explanation
ΔP/P = -D*(Δy)
-20/1,050 = -D*(.25%)
-1.9% = -D*(.25%)
D* = 7.6
D = D*(1 + y)
D = 7.6(1.0625) = 8.075


A bond has a current price of $1,030. The yield on the bond is 8%. If the yield changes from 8% to 8.1%, the price of the bond will go down to $1,025.88. The modified duration of this bond is _________.

A.4.32
B.4- correct
C. 3.25
D. 3.75

Explanation
[(1025.88-1030)/1030] = -D(Change in Y = .1)
= 4%


A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be __________ if its yield is 9%.

A.7
B.9
C. 9.39
D. 12.11- correct

Explanation
Perpetuity = (1+y) / y


A bond with a 9-year duration is worth $1,080, and its yield to maturity is 8%. If the yield to maturity falls to 7.84%, you would predict that the new value of the bond will be approximately _________.

A.$1,035
B. $1,036
C. $1,094- correct
D. $1,124

Explanation
ΔP/P = -D*(Δy)
D* = D/(1 + y) = 9/1.08 = 8.33
ΔP/P = -D*(Δy) = -8.33(-.16%) = 1.33%
New price = $1,080(1.01333) = $1,094.40


The duration of a bond normally increases with an increase in:
I. Term to maturity II. Yield to maturity III. Coupon rate

A.I only- correct
B.I and II only
C. II and III only
D. I, II, and III


Which of the following set of conditions will result in a bond with the greatest price volatility?

A. a high coupon and a short maturity
B. a high coupon and a long maturity
C. a low coupon and a short maturity
D. a low coupon and a long maturity- correct


An investor who expects declining interest rates would maximize their capital gain by purchasing a bond that has a _________ coupon and a
_________ term to maturity.

A.low; long
B.high; short
C. high; long
D. zero; long- correct


If you choose a zero-coupon bond with a maturity that matches your investment horizon, which of the following statements is (are) correct?
I. You will have no interest rate risk on this bond.
II. In the absence of default, you can be sure you will earn the promised yield rate.
III. The duration of your bond is less than the time to your investment horizon.

A.I only
B.I and II only- correct
C. II and III only
D. I, II, and III


A zero-coupon bond is selling at a deep discount price of $430. It matures in 13 years. If the yield to maturity of the bond is 6.7%, what is the duration of the bond?

A.6.7 years
B.8 years
C. 10 years
D. 13 years- correct


Which one of the following statements correctly describes the weights used in the Macaulay duration calculation? The weight in year t is equal to
____________.

A. the dollar amount of the investment received in year t
B.the percentage of the future value of the investment received in year t
C. the present value of the dollar amount of the investment received in year t- correct
D. the percentage of the total present value of the investment received in year t


The duration is independent of the coupon rate only for which one of the following?

A. discount bonds
B. premium bonds
C. perpetuities- correct
D. short-term bonds


You purchase one MBI July 120 call contract (equaling 100 shares) for a premium of $5. Hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ______ on the investment.

A.$200 profit
B.$200 loss- correct
C.$300 profit
D.$300 loss

Explanation
option payoff = 123 – 120 = 3; option profit = 3 -5 = -2
For one contract, which is 100 call options, profit = -2 * 100 = – 200


You purchase one MBI July 120 put contract (equaling 100 shares) for a premium of $3. Hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ______ on the investment.

A.$300 profit
B.$300 loss- correct
C.$500 loss
D.$200 profit


You write one MBI July 120 call contract (equaling 100 shares) for a premium of $4. You hold the option until the expiration date, when MBI stock sells for $121 per share. And You will realize a ______ on the investment.

A.$300 profit- correct
B.$200 loss
C.$600 loss
D.$200 profit


All else the same, an American-style option will be ______ valuable than a ______ style option.

A.more; European– correct
B.less; European-
C.more; Canadian-
D.less; Canadian-


The writer of a put option _______________.

A.agrees to sell shares at a set price if the option holder desires
B.agrees to buy shares at a set price if the option holder desires- correct
C.has the right to buy shares at a set price
D.has the right to sell shares at a set price


A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is _________.

A. at the money
B. in the money- correct
C. out of the money
D. knocked out


A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is _________.

A.at the money
B.in the money- correct
C.out of the money
D.knocked in


You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________.

A.covered call- correct
B.long straddle
C.naked call
D.money spread


You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________.

A.long straddle
B.naked put
C.protective put- correct
D.short stroll


The maximum loss a buyer of a stock call option can suffer is the _________.

A.call premium- correct
B.stock price
C.stock price minus the value of the call
D.strike price minus the stock price


The potential loss for a writer of a naked call option on a stock is _________.

A.equal to the call premium
B.larger the lower the stock price
C. limited
D.unlimited- correct


A writer of a call option will want the value of the underlying asset to __________, and a buyer of a put option will want the value of the underlying asset to _________.

A.decrease; decrease- correct
B.decrease; increase
C.increase; decrease
D.increase; increase


The May 17, 2015, price quotation for a Boring call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boring is $69.80. The premium on one Boring November 50 call contract is _________.

A.$1,980
B. $4,900
C. $5,000
D.$2,080- correct


You purchase one MBI March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is _________.

A.$120
B. $1,000
C. $11,000- correct
D.$12,000

Explanation
Profit= 100(120-10)


You sell one IBM July 90 call contract for a premium of $4 and two puts for a premium of $3 each. And you hold the position until the expiration date, when IBM stock sells for $95 per share. You will realize a ______ on this strip.

A.$300 profit
B.$100 loss
C.$500 profit- correct
D.$200 profit

Explanation
1C = 4 – 5 = -1
2P = 2×3 = 6
—————–
= 5 x 100 = $500 Profit


An investor purchases a call at a price (premium) of $2.50. The strike price is $35. If the current stock price is $35.10, what is the break-even point for the investor?

A.$32.50
B. $35
C. $37.50- correct
D.$37.60


An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $.85, what is the break-even point for the investor?

A.$24.15- correct
B. $25
C. $25.87
D.$27.86


Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases?

A. long call and short put
B. long call and long put
C. short call and short put
D. short call and long put- correct


You purchaseone MBI July 90 call contract for a premiumof $4.The stock has a 2-for-1 split prior to the expiration date. And you hold the option until the expiration date, when MBI stock sells for $48 per share. You will realize a ______ on the investment. Hint: after split, you essentially have 2 call contracts, with K=45 and premium=2 on per share basis

A.$300 profit
B.$100 loss
C.$400 loss
D.$200 profit- correct


The __________ is the stock price minus exercise price, or the profit that could be attained by immediate exercise of an in-the-money call option.

A. intrinsic value – correct
B. time value
C. stated value
D. discounted value


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